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Economics chapter 1 - microecon
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economics - microeconomics - chapter 1 notes - advantages, scarcity, opportunity cost, circular flow model
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Chapter 1 - What’s in economics for you ?- The problem of scarcity is due to the inability to satisfy all of our wants - it arises
from our limited time, energy and money.
- Economics is how individuals, businesses, and governments make the best possible
choices to get what they want, and how those choices interact in markets
- Because of scarcity, every choice involves a trade-off — you have to give up
something to get something else
- Scarcity → Trade- off → Choice → Smart Choices → weighing costs and
benefits → Opportunity cost - the cost of the next best alternative
- In smart decisions - opportunity cost > money cost
- For a smart choice, the value of what you get must be greater than value of
what you give up
- Incentives - rewards and penalties for choices
- you are more likely to choose actions with rewards (positive incentives), and
avoid actions with penalties (negative incentives)
- Opportunity cost and comparative advantage are key to understanding why
specialising and trading make us all better off.
- With voluntary trade, each person feels that what they get is of greater value than
what they give up
- Production possibility frontier - maximum combinations of products or services
that can be produced with existing inputs
- Absolute advantage → the ability to produce a product or service at a lower
absolute cost than another producer (money cost)
- Comparative advantage → the ability to produce a product or service at a
lower opportunity cost than another producer
- Opportunity cost = give up / get
- Comparative advantage key to mutually beneficial gains from trade
- Trade makes individuals better off when
- each specialises in producing a product or service with comparative
advantage (lower opportunity cost)
- trades for the other product or service
- Specialisation according to comparative advantage and trade allows each trader to
consume outside her PPF, an impossible combination without trade
- all arguments you will ever hear for freer trade are based on comparative
advantage
- Even if one individual has absolute advantage in producing everything at lower cost,
differences in comparative advantage allow mutually beneficial gains from
specialisation and trading
- Economic model - a simplified representation of the real world, focusing attention
on what’s important for understanding
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